Depreciation and your vehicle’s value

We love our cars. We name them, feed them premium fuel, wash them with gentle care and follow manufacturers’ guidelines for preventive maintenance.

We do these things to ensure that our vehicles stay looking young, feel and drive their best, and generally live a long and reliable life. It’s an emotional thing, and, we reason, it helps protect our investment and retain the vehicle’s value long term.

Sadly, there is little we can do to change the true defining ailment of vehicle aging. Depreciation is the decline of a vehicle’s value relative to its original purchase price, and it is the single biggest cost of vehicle ownership for most drivers.

Unlike resale homes, which often increase in value and ultimately function as equity assets for their owners, used vehicles, once re-sold or re-marketed, are depreciating assets which often decline in value faster than our rate of payment on loans or payment plans. This can lead to a situation called negative equity, where a vehicle’s retained value is markedly lower than the outstanding amount remaining to be paid against the vehicle.

Depreciation rates are not standard; different vehicles depreciate at different rates over the course of their lifetime. In general, the biggest slide occurs in the first few months of ownership. This is partly due to the transition from “new” to “used” status, but more importantly, is largely attributed to the costs of offering a vehicle for sale, or the “mark-up”.

No one likes to pay a mark-up, but in the case of vehicles, much of the dealer’s mark-up is eaten up on legitimate expenses such as interest, overhead, advertising of the vehicle and payment to the salespeople and other staff who work in the dealership. Even though the actual profit a dealer makes selling a vehicle may be as low as 0.1—1.0% of the vehicle’s selling price, the gross profit margin is often greater, but with a good portion of that money going to pay for the items mentioned above.

The difference between the net “cost” of the vehicle and the selling price is the difference of “wholesale value” versus “retail pricing”. Couple that spread with the age and mileage based decline in a vehicle’s value, and it is easy to see why the first year of new vehicle ownership is probably the most expensive. Between roughly 2-4 years of age, the decline slows down a bit, and this is why many industry experts assert that the best value is a 2 or 3 year old used vehicle.

Once a vehicle is out of warranty or has high mileage, a short steep drop occurs which may bring the vehicle down to a value of a few hundred to a few thousand dollars, depending on its make and model and the condition it is in. Other factors, such as manufacturers’ incentives, vehicle condition and insurance related incidents, play a role in the specific slope of an individual vehicle’s rate of depreciation.

For example:

A 2012 Ford Focus SE 4dr Sedan had an MSRP of $17,500+HST. You paid $19,775

In spring of 2013, with 25,000 kms on the odometer, your vehicle has a Black Book value of up to $12,200. This represents a first year drop from retail selling price to wholesale value of about $5300 or 30%.

At 4 years of age (2016) the Focus will be worth approximately $7,400 (4 years of age = 58% depreciation)

At 6 years of age, the vehicle will be worth somewhere in the $4,400 range.

Assuming that no major defects, damages or accidents occur to this vehicle, and you drive approximately 25,000 kms per year, you can expect the Ford Focus to be worth about 25% of the original MSRP at 6 years of age.

*example figures taken from CanadianBlackBook.com

It makes sense, really, when you consider that our primary needs from our vehicles are not actually musical entertainment and heated seating areas, but good old fashioned safety and reliability. As a vehicle ages, the technology in it becomes outdated, more components become likely to fail, and regular wear and tear begin to break down surfaces and systems in and outside the vehicle. Just like people, vehicles are intended to have a lifespan, and nothing sort of life support can keep a vehicle alive forever.

Links:
10 Best and Worst Cars for Depreciation
Canadian Black Book Vehicle Value Calculator